We Think You Should Be Aware Of Some Concerning Factors In NIPPON PARKING DEVELOPMENTLtd's (TSE:2353) Earnings

NIPPON PARKING DEVELOPMENT Co.,Ltd.'s (TSE:2353) robust recent earnings didn't do much to move the stock. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

See our latest analysis for NIPPON PARKING DEVELOPMENTLtd

Examining Cashflow Against NIPPON PARKING DEVELOPMENTLtd's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

NIPPON PARKING DEVELOPMENTLtd has an accrual ratio of 0.41 for the year to January 2024. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of JP¥4.16b, a look at free cash flow indicates it actually burnt through JP¥728m in the last year. We saw that FCF was JP¥3.1b a year ago though, so NIPPON PARKING DEVELOPMENTLtd has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of NIPPON PARKING DEVELOPMENTLtd.

Our Take On NIPPON PARKING DEVELOPMENTLtd's Profit Performance

As we have made quite clear, we're a bit worried that NIPPON PARKING DEVELOPMENTLtd didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that NIPPON PARKING DEVELOPMENTLtd's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into NIPPON PARKING DEVELOPMENTLtd, you'd also look into what risks it is currently facing. To that end, you should learn about the 2 warning signs we've spotted with NIPPON PARKING DEVELOPMENTLtd (including 1 which is potentially serious).

Today we've zoomed in on a single data point to better understand the nature of NIPPON PARKING DEVELOPMENTLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.